⚾️Are "Distressed SPACs" Still a Thing?⚾️

Jason Mudrick's SPAC II scoops up The Topps Company. Wait. What??

Our coverage of Mudrick Capital LP’s second SPAC began with a detailed analysis of his first, Hycroft Mining ($HYMC).

TLDR: Mudrick’s first SPAC engineered a path forward for one of his long-held illiquid holdings in the 11th hour before the fund would have needed to return cash to investors. We tuned into a YouTube interview with Mudrick’s CIO, Jason Mudrick, where he speculated about a second SPAC vehicle, but insisted that his focus was “on making Mudrick Capital Acquisition I a success” before launching SPAC II.

Reasonable people can disagree on the definition of “success.” Success could be simply launching a SPAC in the first place. Or it could be successfully de-SPAC’ing into a viable merger candidate. Or it could be the post-merger entity shooting to the moon a la Draftkings Inc. ($DKNG). Pick your barometer but suffice it to say that many people wouldn’t choose “down 60% post-IPO” topped with “weak FY 2021 guidance” as their winning metric.

But past performance is not indicative of future performance. Nor is one investment enough to taint what otherwise appears to be an impressive investing run. And so surely Mudrick wasn’t going to let the absolute dumpster fire that is HYMC get in the way of launching SPAC II and then, in impressive short order, making a big announcement.

On April 6, 2021Mudrick Capital Acquisition Corporation II announced the purchase of The Topps Company, Inc. Topps is a NY-based manufacturer of collectibles, chewing gum, and candy. A slide from the merger presentation breaks down the company’s mix of offerings:

A. Ownership Structure

Founded originally in 1938, Topps was acquired in October 2007 by The Tornante Company LLC (run by former Disney CEO Michael Eisner) and Madison Dearborn Partners, LLC for $385mm. The NYTimes stated that the original Tornante x MDP collab was “a bet on a brand that elicits an “emotional connection” as strong as Disney…” Topps’ content partners certainly fit that strategy; the company’s roster includes organizations and brands such as MLBUEFAThe Formula One Group ($FWONA)Star WarsMarvel, and World Wrestling Entertainment, Inc. ($WWE). Tornante Chairman Michael Eisner’s connections were no doubt invaluable in helping Topps make inroads. Disney properties include Star Wars and Marvel, and Tornante owns an equity stake in Portsmouth Football Club.

Pro forma for the Mudrick acquisition, Tornante retains 36% equity ownership in Topps. MDP and the existing management team will own 8%. Mudrick Capital will own 7% of the “Founder Shares,” while SPAC investors will own 28%. Filling out the cap stack is a $250mm PIPE offering, which accounts for 21% of the equity. Per the press release, the PIPE is led by Mudrick and names GAMCO Investors, Inc. and Wells Capital Management as co-investors. Based on merger presentation financials, Mudrick and friends are recapitalizing Topps at a 12.5x Pro Forma 2021 Adj. EBITDA multiple.

B. Segment Breakdown

Physical Sports & Entertainment is Topps’ largest segment. At $314mm of 2020 revenue, the segment makes up 55% of Topps’ total full year revenue. The business focuses on trading cards, stickers and “curated experiences” such as experiential events in partnership with UEFA Champions League.

In FY 2020, the Physical S&E segment grew 50% YoY. Topps’ estimates the segment will hit $398mm and $454mm in revenue for FY21 and FY22, growing 27% and 14% respectively. Topps has been able to quickly capitalize on the hot consumer flavor of the month, whether it was Star Wars: The Mandalorian, the WWEBundesliga, or Godzilla, aligning with the most recent film release. Additionally, Topps has driven margin growth through some preeetty aggressive pricing strategies. FinTwit was all over it:

Topps’ Confection Segment printed $198mm of revenue in FY 2020 and was ~35% of the business. Topps calls its brands, including Bazooka GumRingPopPushPopBaby Bottle Pop, and Juicy Drop Pop, “Edible Entertainment.” (This compilation for Baby Bottle Pop ads triggers all the early-90s nostalgia we can handle.) These brands are sold in major retail locations in the U.S. and Internationally, including 7-Eleven, Inc.BJs Wholesale Club Holdings Inc. ($BJ)Dollar Tree, Inc. ($DLTR)Kroger Co ($KR)Walmart Inc. ($WMT)Target Corporation ($TGT)Walgreens Boots Alliance Inc. ($WBA), and Carrefour S A FREWE Group, and Tesco PLC. Topps confections are outperforming the broader confections category, and three of Topps’ products are in the top 5 best-selling non-chocolate items in U.S. Retail.

In 2020, the Confections segment was down 10% YoY, likely impacted by COVID-19: apparently the category gets some tailwinds from screaming toddlers demanding candy in the checkout aisle of the local grocery store. Damn you DoorDash Inc. ($DASH). Anyway, Topps sees that segment bouncing back 14% in FY21 before moderating to 5% in FY22.

C. Steak & Sizzle

Topps’ Digital Sports & Entertainment and Gift Cards together make up 10% of Topps’ total revenue. We’ve previously shared our thoughts on gift cards; we find it fascinating that between 6 - 10% of prepaid gift cards are never used by the customer, resulting in ‘breakage income’ at 100% margin to the business. But if Topps’ Physical S&E and Confections are the ‘steak’ of the investment thesis, Digital is certainly the “sizzle.”

Digital Sports & Entertainment provides app-based, digital collectibles and games with the ability to print on-demand. This segment grew 72% YoY as Topps directly monetized the Intellectual Property of its partnerships through its mobile apps. Per the merger presentation, daily active users on Topps’ apps have grown at a ~50% CAGR from January 2019 to January 2021. Per a NYTimes article, Tornante, MDP, and company management have been prioritizing this shift:

In the years since Mr. Eisner’s initial purchase, Topps has focused on a shift to digital, starting online apps for users to trade collectibles and play games. It also created “Topps Now,” which makes of-the-moment cards to capture a defining play or a pop culture meme. (It sold nearly 100,000 cards featuring Senator Bernie Sanders at the presidential inauguration in his mittens.) And it has moved into blockchain, too, via the craze for nonfungible tokens, or NFTs.”

While we have no f*cking clue what’s going on with NFTs, there’s no question pandemic lockdowns have fueled a resurgence across all of memorabilia. The article continues with some comments from Mr. Mudrick and Topps’ current CEO Michael Brandstaedter:

The secondhand market is particularly hot, with a Mickey Mantle card recently selling for more than $5 million. “Topps probably made something like a nickel on it, 70 years ago,” said Jason Mudrick, the founder of Mudrick Capital. NFT mania will allow Topps to take advantage of the secondhand market by linking collectibles to digital tokens. Topps is also growing beyond sports, like its partnerships with Marvel and “Star Wars.”

It continues to see value in its core baseball-card business, as athletes come up from the minor leagues more quickly. “The trading card business has been growing for the last several years,” Michael Brandstaedter, the chief executive of Topps, said. “While it definitely grew through the pandemic — and perhaps accelerated — it did not arrive with the pandemic.” (emphasis added)

Topps’ foray into NFTs through its collaboration with Wax Blockchain on ‘Garbage Pail Kids’ has been wildly successful, selling out in 27 hours with $100k+ in revenue. But the reported numbers indicate Topps derives limited value from digital today:

But that looks set to change. Perhaps quickly. It looks highly likely that Topps is going to do some exciting digital things with the likes of the Anaheim Angels’ Mike Trout and Shohei Ohtani, among others; it signed both to long-term card and autograph deals that, while the details are not entirely clear, likely includes some sort of digital element to it (at least with Trout given the timing).

Topps is innovating in real time. The Verge reported on Major League Baseball’s latest initiative earlier this week:

Major League Baseball has announced its latest move to cash in on the NFT craze: official blockchain-based versions of classic Topps baseball cards. Topps is selling the new NFT baseball cards through the WAX blockchain, which the company has used for its earliest blockchain-based collectibles.

The first “Series 1” cards will be sold starting on April 20th, with 50,000 standard packs (containing six cards for $5) and around 24,000 premium packs (offering 45 cards for $100) set to be sold in the first wave. Topps is also offering a free “exclusive Topps MLB Opening Day NFT Pack” to the first 10,000 users who sign up for email alerts for new releases.

It’s a similar idea to the NBA’s white-hot Top Shot NFTs, which offer fans purchasable video clips (called Moments) in card-like packs. Top Shot Moments are already a massive business — some have sold for upwards of $200,000, and more than 800,000 accounts have yielded over $500 million in sales so far.

Not too shabby.

While the future may be digital, Mudrick’s investment thesis as outlined in the NYTimes’ article is focused on the longevity and stability of the physical business.

“That resilience is part of the bet that Mudrick Capital is making on the 80-year old Topps. It’s a surer gamble, Mr. Mudrick said, than buying one of the many unprofitable start-ups currently courting SPAC deals.”

PETITION and other public investors only have a limited period of financials to digest, so we can’t refute Mr. Mudrick’s claims of Topps’ financial resilience. From the financials we can see, Topps is growing and profitable. FY20 revenue of $567mm represented growth of 23% from prior year levels, and the company projects — ah, the beauty of SPACs, go-forward projections! — those trends to continue. FY21 and 2022 are estimated to grow to $692mm and $777mm, or 22% and 12% respectively. EBITDA margins expanded considerably in 2020, from 11% to 16%, and CapEx is incredibly low.

The largest part of Topps’ business is growing with the highest EBITDA margins – a positive sign.

But is Topps really the sort of business Mudrick Capital intended to acquire with MUDS II? On one hand, the S-1 spins a different story:

Our business strategy is to identify, combine with and maximize the value of a company that has either recently emerged from bankruptcy court protection or will require incremental capital as part of a balance sheet restructuring. In particular, we believe that many post-restructured companies suffer from a valuation discount due to their opaqueness, complexity, non-long term ownership base and overall illiquidity. We believe that our in depth understanding of restructurings and post-restructuring company analysis, coupled with the more liquid publicly traded vehicle the company offers in an initial business combination, could result in significant value creation for our stockholders. Creating value for our stockholders is the ultimate goal of this business strategy.” (emphasis added)

It's clear from the language that Mudrick Capital Acquisition Corporation II was intended to be a distressed-oriented SPAC. But Mudrick & Co. went in the complete opposite direction. Comparing Topps and Hycroft Mining, this couldn’t be a more divergent duo of companies; we liken the two businesses to ‘apples and napalm grenades’. The market seemingly concurs. Juxtapose this ⬇️ with the Hycroft chart ⬆️:

Mudrick appears to somewhat acknowledge this in the NYTimes article, stating that “[Mudrick’s] core business is value investing.” But with Mudrick paying 12.5x for 35% of the equity when including the founder shares, we wonder if Topps represents ‘value investing’ or thesis drift. It’s no secret earning a return in distressed has been challenging over the past decade, and — as we highlighted in Sunday’s Members’-only briefing — things don’t appear to be getting any better any time soon. Note this thread (clickthrough) ⬇️.

Just to piss in everyone’s faces, Ares Management Corp’s CEO Michael Arougheti added (in a conversation with Bloomberg’s Kelsey Butler):

“There’s underlying stress that will find its way into the markets but I don’t think that’s anytime soon,” Arougheti said at a virtual Bloomberg News event this week. Default rates are “artificially low” and asset prices are buoyant because “there’s so much liquidity masking that default rate that we’ve all grown accustomed to seeing at this point in the cycle that we’re probably two to three years out before we start seeing a traditional default cycle play out.”

And so maybe Topps should be viewed in the same lens as the infamous Howard Marks’ ‘Something of Value’ investor letter — a sign of capitulation among notable distressed managers. We’re taking a more passive view on this. From our perspective, turning around a distressed businesses today requires a significant investment in both capital and time. And there’s huge terminal value risk – many distressed businesses models are structurally challenged and may not exist in the next 5 – 10 years. In that context, Mudrick’s move to acquire a stable, healthy business at a full valuation makes intuitive sense. Why not sacrifice a few basis points of alpha to write a big check that doesn’t cause heartburn for a decade? (Side note: we think Starboard Value’s acquisition of Cyxtera ties back to this theme, which we previously covered here).

As times change, so must distressed managers. In our humble opinion, Topps and Hycroft are worth paying attention to not only as interesting businesses in their own right, but as bellwethers for capital flows.

Of course, as we continue to evaluate all of this, we may get some additional data points:

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😎Notice of Appearance: Daniel McNamara, Principal at MP Securitized Credit Partners😎

Today we welcome Daniel McNamara, a Principal at MP Securitized Credit Partners, where he’s worked since the summer of 2012. Prior to that he was a CMBS trader at Societe Generale, Braver Stern & Co., and UBS. He’s our first investor to make a Notice of Appearance with us and so we hope you enjoy this. It will be a bit longer than usual.

PETITION: Welcome Dan. Thanks for doing this. Let’s dive in. Back in January 2017, we, like seemingly everyone on Wall Street, got our hands on Eric Yip of Alder Hill Management’s 58-page treatise on CMBX 6 BBB- in what, months later, several mainstream media outlets would dub “the next big short.” Yip’s report had “DO NOT DISTRIBUTE” tagged on the bottom of it. Lol. For the uninitiated, in simple terms what is CMBX 6 and how does it work?

McNamara: Thanks for having me. CMBX 6 is an index that tracks the performance of 25 commercial mortgage-backed securities (CMBS) that originated in 2012. Each securitization is backed by loans on commercial real estate, and the underlying loans are diversified across geographic regions and property types, including multi-family, office, hotel, industrial, and finally, retail: CMBX 6 has a higher exposure to retail (over 40%)--and to regional malls, specifically (17%)--than any of the other indices (CMBX 1 thru 14). As for the terminal value of a tranche within the CMBX index, that can be derived by adding up the number of deals that an investor expects to pay off. Each of the 25 deals that payoff in full will contribute 4 points to the ultimate recovery of each tranche. (25 deals x 4 points = par)

PETITION: Your shop bought in almost immediately. But not literally: your team took its time and did its own research before putting money behind the concept-adoption; your colleague Katie McGee and others visited several malls and saw the dumpster fires up close. Eventually you pulled a Michael Burry and went in on credit default swaps against CMBX 6. Mr. Yip was much earlier than you. Why? What ultimately was the straw that broke the camel’s back and catalyzed your ultimate investment? If you can share, how big was your position? What percentage of your fund? We’d love to see what the level of conviction was!

McNamara: We started to visit a lot of malls in 2017 as the CMBX 6/Mall Short gained a great deal of attention in 2017 with the Alder Hill White Paper. It was a very well thought out paper that laid the foundation for all the fundamental reasons to be short the Regional Mall space using CMBX 6. Our only concern was timing: The negative carry on CMBX 6 was the main issue (3 points a year for BBB-6 and 5 points for BB.6), and we thought there might be better opportunities to add to the short trade as maturity approached in 2022 and the “short” became less expensive. It was our highest conviction trade and largest position in the Hedge Fund in 2019/20. In February 2020, we launched the “MP Opportunity Fund I,” which was created entirely to short CMBX 6 and to take advantage of the massive mis-pricing. 

PETITION: What was it like, shortly after putting on the position, getting your face ripped off? Yip shut his fund. Other funds collapsed on the trade. You were up against AllianceBernstein and other large institutions and they were winning. Why? How?

McNamara: 2019 was a difficult year for MP. CMBX BB.6 rallied from $72 to $88.50 along with the negative carry of 500bp, even though we continued to see the fundamentals behind these properties deteriorating. The rally seemed to be driven by a perfect storm of a Goldilocksian economic backdrop, hedge fund short covering, and mutual funds adding to their long positions as they received inflows. 

PETITION: Ultimately what changed? Did Carl Icahn’s involvement move the needle?

McNamara: Icahn’s involvement definitely improved the technicals of the short squeeze that took place in 2019. Icahn placed a large investment in shorting CMBX 6--and the publicity behind his involvement encouraged others to make similar investments.

PETITION: At this point, how has the trade worked out? What’s the return look like? What’s your go-forward view on CMBX 6? 🤑

McNamara: In May of  2020, we wound down the above-mentioned MP Opportunity Fund with an approximate return of 120% net to investors. Our focus now is solely on shorting CMBX BB.6: The asymmetric return available in CMBX BB.6 at this price ($53) is very attractive. After taking down our BB.6 and BBB-6 shorts post covid last year, CMBX BB.6 is now our largest position again in the hedge fund. We believe the ultimate terminal value for CMBX BB.6 is ~$28. 


PETITION: The pandemic has claimed CBL and PREIT. WPG is teetering and Macerich looks wobbly. A lot of people think David Simon is full of sh*t. Thoughts?

McNamara: The Mall REIT space is fascinating. We have always believed that higher quality malls will survive; lower quality regional malls is where the pain lies. CMBX 6 malls most resemble the CBL, WPG, and PREIT portfolios. SPG and Brookfield have focused their efforts on the Class A malls and have continued to give back the keys on their lower quality malls.

PETITION: What do you make of SPG’s strategy to buy up distressed retailers and function as both landlord and equityholder? They’ve clearly been busy in bankruptcy court.

McNamara: SPG is trying their best to hang onto as many tenants as possible, and buying these bankrupt companies in order to stem the exodus from their enclosed malls isn’t without risk. That said, these aren’t large investments relative to the size of SPG: If the approach grants some of their malls more time, they might not be throwing good money after bad. TBD. 

PETITION: What do you make of Amazon Inc ($AMZN) reportedly gobbling up dead malls and converting them into distribution points?

McNamara: Amazon is taking advantage of some redevelopment opportunities in areas where they need more space. As it relates to CMBS, Amazon will not be the savior that some are hoping for: The cost to redevelop these malls is very large. The Amazon bid for these malls is ground value minus demolition costs. I don’t believe that any of the malls left in CMBX 6 will be paying off their debt because Amazon purchased them.

PETITION: Let’s move away from malls. There’s a lot of fear out there among commercial real estate lenders that offices won’t come back. That work-from-home isn’t going away. What do you think? What are your thoughts about co-working spaces like WeWork going forward?

McNamara: Work from home is here to stay. How much that will affect offices going forward is difficult to quantify at this point, but we do think that it will put pressure on office valuations and create more opportunities down the road for mortgage credit investors like us. 

PETITION: The delinquency rates are falling across the board but hospitality remains stubbornly high. What do you expect to happen in that sector now that the economy is re-opening? How would one play continued pain in the sector?

McNamara: Headline delinquency rates are falling primarily due to forbearance agreements. This is just a short-term band-aid. Post 2008, it took 3 years for CMBS delinquencies to reach their peak. CRE is a slow moving product, and it takes time for these properties to sort their way through the system. We are expecting CRE to be the epicenter of distressed investing in the next few years. Costar currently predicts that about $320b in distressed assets will come to market over the next five years — a remarkable 60% increase over the $192b in distressed assets that came to market between 2010 and 2014, following the last recession.

PETITION: Why hasn’t there been a flurry of distressed real estate activity in NYC?

McNamara: Forbearance agreements have provided a lot of borrowers with a "free option." While many realize their property is under water, they will hold on until the forbearance period is over in hopes of a speedy CRE recovery. Also, we have seen foreclosures being delayed and a large bid/ask spread between sellers and buyers which all contribute to a "kicking of the can". None of these things are long term solutions though and we are confident that a long period of "distress" will be coming to the CMBS/CRE markets.

PETITION: Which recovers first? NYC or SF? Do you buy into the idea that, long-term, those cities will lose out to places like Austin and Miami?

McNamara: Pre covid, NYC & SF were losing residents for Miami & Austin just based on taxes and I don't see that migration slowing anytime soon. Some cities (like SF and NYC) were bulletproof post 2008, due to capital fleeing to safety; I believe they will struggle more post covid relative to the gateway cities. Also, NYC & SF were priced to perfection pre covid and it’s difficult to see that pricing returning anytime soon. This is especially true as people feel more comfortable living/working further away from these larger cities.

PETITION: What is the best piece of professional advice that you’ve ever gotten and why?

McNamara: “Work hard and play nice in the sandbox.” The former part is obvious but what people don’t realize is the CMBS market is a small place relative to the size of the entire CRE market--if you don’t act with integrity, it can very quickly impact your reputation. And in general, I like the sandbox analogy because it’s good to remember that we can have fun here--if you love what you do, work can feel more like play.

PETITION: What are some books or podcasts that have helped you get to where you are today?

McNamara: The best podcast I listen to right now on the topic of CMBS/CRE is the weekly Trepp Podcast. They do a great job of boiling down the latest relevant topics in my space. For books, I’m a Michael Lewis fan, of course--my favorites are Liar’s Poker and The Big Short.

PETITION: Those are definitely classics. Thanks for doing this, Dan, and good luck.


We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve updated the list to include “The Caesars Palace Coup: How a Billionaire Brawl Over the Famous Casino Exposed the Power and Greed of Wall Street,” by Max Frumes and Sujeet Indap. Max recently made a Notice of Appearance with us here. And here is an excerpt.


Gary Lembo (Partner) joined Paladin from Solar Capital Partners LLC.

Spencer Ware (Managing Director, Retail Practice Leader) joined Conway MacKenzie from AlixPartners LLP.

🙌Congratulations to:🙌

Michael Teplitsky on his promotion to Partner at Wynnchurch Capital.

Richard Shinder on his appointment to the board of directors of Il Mulino.

Scott Fitch on his promotion to Partner at Wynnchurch Capital.

💰New Opportunities💰

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